How do term deposits work?
Term deposits in Sydney work much the same across the rest of the country. By applying for a certain term—say, one year—you’ll be given a fixed interest rate that will apply to the deposit until its maturation date.
Upon reaching maturity, you may choose to either roll over to a new term with the interest gained or instead choose to have your savings deposited into a bank account of your choosing.
It may be tempting to apply for a 5-year term at a higher interest rate, but keep in mind that if you need to withdraw this cash at any point before the term deposit maturation, you’ll likely have some restrictions such as AMP term deposits requiring a 31-day prior notice for early withdrawal.
Why might you need a term deposit in Sydney?
With inflation on the rise, it’s becoming increasingly important for Sydneysiders to keep their savings stored away in high-interest accounts to offset inflationary pressures.
Term deposits are a great way to keep money stashed away as they generally offer higher interest rates on average than savings accounts. However, to gain a higher interest rate, you’ll need to keep your cash stored away for longer terms which may not work for savers with limited cash flow.
In addition, it’s important to note that term deposit providers will usually require a minimum deposit amount ranging from $1,000-$25,000 depending on the account.
What banks offer good term deposit rates in Sydney?
As Australia’s biggest city, Sydney has wide access to a variety of term deposit providers giving a breadth of options.
But Sydneysiders no longer need to restrict themselves to local branches anymore as more online term deposits are offered by banks who themselves find greater advantage in becoming increasingly digital.
Should I take a long or short-term deposit?
The length of your term deposit depends on your financial situation as well as the financial environment you find yourself in.
For instance, taking a longer term deposit will generally give you a higher interest rate which you can take advantage of well into a low-interest-rate environment due to the rate being fixed.
However, if you were to take a 5-year term deposit and find yourself in a lower interest rate environment by the time of maturation, it would leave you with few options in terms of where to deposit your money.
In turn, shorter term deposits can be more advantageous in long-term rising interest rate conditions as they allow you to roll over (with interest gained) into an even better interest rate. You can also use shorter periods to keep your money safe and growing for a later investment that they are planned for.
What are the cons of term deposits?
Whilst term deposits are classed as a safe investment, they do have some trade-offs in comparison to riskier investment types.
Low returns: In comparison to other investments such as stocks and bonds, term deposits usually have lower rates of return
Lack of liquidity: Term deposits generally have to give 31 days notice if they wish to withdraw before the maturation date.
Inflation risk: The interest earned on a term deposit may not keep up with inflation, meaning that you could end up with overall less by the maturation date.
Limited diversification: Term deposits are simply a lump sum of money deposited in a particular bank account.
What’s the difference between a term deposit and a savings account?
So how are term deposits any different from a savings account? For one, one big difference that savings accounts have is that they generally have a variable interest rate.
What this means is that if you open a savings account with an interest rate of 3%, you’re in no way guaranteed to keep this, especially if the economic situation deteriorates.
On the other hand, term deposits usually have a fixed interest rate. This means that if you applied for a 3% term deposit for 2 years, you’ll keep that interest rate right up until the maturation date.
How do I apply for a term deposit?
Compare: Look around for term deposits with the best rates. At Mozo we compare term deposits with the best interest rates for comparison.
Decide deposit amount: Depending on the term deposit provider, your minimum deposit amount will vary so make sure you have enough.
Set up your deposit: Make sure you have all the necessary documents nearby to make the process as easy and quick as possible.
Wait: for as long as you set your deposit term and watch your money grow until maturation.